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Risk Premia In The Term Structure Of Interest Rates: A Panel Data Approach

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  • Bams, Dennis
  • Wolff, Christian C

Abstract

This paper proposes a panel data approach to modeling the risk premium in the term structure of interest rates. Specifically, we develop a fixed maturity/random time effects model that implies a time-invariant one-factor model. Our approach allows us to disentangle risk premia and unexpected excess returns, which is not possible in the standard time series approach. In addition, small sample bias is alleviated and statistical efficiency improved. Our results allow for interesting inferences about maturity-specific effects in the term structure. First, the expectations hypothesis is soundly rejected for our full data panel of U.S. Treasury securities. Second, a considerable degree of mean reversion is present in the risk premia. Third, our findings shed new light on the magnitude of the slope coefficient in regressions of the yield onto the forward curve.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2392.

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Date of creation: Feb 2000
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Handle: RePEc:cpr:ceprdp:2392

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Keywords: Expectations Hypothesis; Risk Premium;

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References

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  1. Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1997. ""Peso problem" explanations for term structure anomalies," Working Paper Series, Issues in Financial Regulation WP-97-07, Federal Reserve Bank of Chicago.
  2. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
  3. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 495-514, May.
  4. Hamburger, Michael J & Platt, Elliott N, 1975. "The Expectations Hypothesis and the Efficiency of the Treasury Bill Market," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 190-99, May.
  5. Campbell, John Y, 1986. " A Defense of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 41(1), pages 183-93, March.
  6. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers 667, Cowles Foundation for Research in Economics, Yale University.
  7. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  8. Pham, Toan M., 1998. "Estimation of the term structure of interest rates: an international perspective," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 265-283, September.
  9. Geert Bekaert & Robert J. Hodrick, 2000. "Expectations Hypotheses Tests," NBER Working Papers 7609, National Bureau of Economic Research, Inc.
  10. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  11. Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1996. "On Biases in Tests of the Expecations Hypothesis of the Term Structure Of Interest Rates," NBER Technical Working Papers 0191, National Bureau of Economic Research, Inc.
  12. Mishkin, Frederic S, 1988. "The Information in the Term Structure: Some Further Results," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 307-14, October-D.
  13. Evans, Martin D. D. & Lewis, Karen K., 1994. "Do stationary risk premia explain it all?: Evidence from the term structure," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 285-318, April.
  14. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
  15. Melino, Angelo, 1988. " The Term Structure of Interest Rates: Evidence and Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 2(4), pages 335-66.
  16. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-99, September.
  17. Jondeau, Eric & Ricart, Roland, 1999. "The expectations hypothesis of the term structure: tests on US, German, French, and UK Euro-rates," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 725-750, October.
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Cited by:
  1. Richard Harris, 2004. "The rational expectations hypothesis and the cross-section of bond yields," Applied Financial Economics, Taylor & Francis Journals, vol. 14(2), pages 105-112.
  2. Balázs Romhányi, 2005. "A learning hypothesis of the term structure of interest rates," Macroeconomics 0503001, EconWPA.

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